Highlighted companies
JD.com Inc ADD, TP HK$345.0, HK$223.6 close
We reiterate Add for JD, since we believe it still has plenty of room to develop its omni channel and intra-city retail business and improve its margins. A positive catalyst would be stronger margins. A key risk is weaker revenue growth, given the sluggish economy.
Meituan ADD, TP HK$240.0, HK$173.8 close
Meituan showed recovery signs starting in Jun, and recovery accelerated in Jul and Aug. We believe Meituan still has huge room to improve its order numbers and margins. A key catalyst would be stronger-than-expected margins. A key risk is weaker-than-expected revenue growth due to the sluggish economy.
Pinduoduo Inc ADD, TP US$120.0, US$69.9 close
PDD’s 2Q22 non-GAAP earnings were better than we expected, owing to better cost savings. We believe PDD has huge room to develop its agriculture business and improve its margins. A positive catalyst would be stronger-than-expected margin expansion. A key risk is weaker top-line growth under the sluggish macro economy.
Significant progress in cost-saving efforts
- Most e-commerce players’ Jun quarter revenue was in line with our expectations, and non-GAAP earnings were above expectations due to effective cost-saving measures.
- We now expect Sep quarter revenue growth to improve vs. Jun quarter, along with the gradual domestic consumption recovery.
- We also expect the e-commerce players to continue to implement cost-saving measures in 2H22F, which will help them to further improve their margins.
- We reiterate our Overweight rating for the e-commerce sector; our top picks are Meituan and PDD.
PDD and Meituan gained market shares in the Jun quarter
Total retail sales in China were down 5% yoy in 2Q22, and online physical goods sales grew by 8% yoy, indicating that online platforms gained market share from offline channels. Among major e-commerce players, Alibaba’s China commerce revenue dropped by 1% yoy, and JD’s revenue grew by 5% yoy in 2Q22, indicating that these top two players are losing market shares, since their product profile focuses more on discretionary products, like apparel and home appliances, which have been impacted by the Covid situation. We believe the business suspension of Alibaba’s top KOL is another reason for its slower growth in 2Q22. PDD’s revenue growth reached 36% yoy in 2Q22, due to its advantage in agricultural and value products, which helped increasing user frequency and ARPU. We believe live-broadcasting e-commerce platforms, especially Douyin gained market share in 2Q22. We estimate that Meituan’s food delivery revenue grew by c.10% yoy in 2Q22, much better than the 16% decline in China catering services.
Revenue growth expected to improve in the Sep quarter
We expect most e-com players to improve their Sep quarter revenue growth, along with consumption recovery. Among our coverage, we expect PDD and Meituan to continue to have stronger revenue growth of 18% and 28% yoy in the Sep quarter. Meituan’s business profile is more resilient than we expected, with 16% yoy revenue growth in 2Q22. Although hotel and in-store revenue was seriously impacted by the Covid situation in 2Q22, food delivery and instant shopping business maintained solid growth momentum. We expect food delivery and in-store revenue growth to recover further in 3Q22F. Advertising and online game revenue was more impacted for Bilibili in 2Q22. The recent normalization of new game license approvals will help game revenue recovery in 3Q22F. In addition, the government policy towards e-commerce platforms turns favorable. In the recent executive meeting of State Council on 08 Sep, government emphasized the significance of the platform economy to stabilize employment.
Cost-saving measures expected to continue in 2H22F
In the Jun quarter, all the e-commerce players adopted cost-saving measures. PDD and achieved the strongest earnings improvement, by cutting their Meituan S&D expenses and streamlining new investment. All the e-commerce players have paid more attention to ROI and cut under-performing business. We expect the cost control measures to continue in 2H22F. Another new development is overseas expansion. , targeting the US market first. Temu online game business grew quite well in overseas markets. PDD launched its international e-commerce platform, Bilibili’s.
Reiterate Overweight for top picks PDD and Meituan
Currently, most e-commerce players are trading at a discount of over one standard deviation of one-year forward PE/PS. Alibaba is trading at 12.9x/10.7x FY22/23F PE, per Bloomberg consensus, offering the highest discount among our coverage. Bilibili’s share price has dropped the most YTD, followed by Tencent and Alibaba. We reiterate our Overweight rating on the e-commerce sector, with PDD and Meituan as our top picks.
